Stocks resumed their upward march last week, rising 2.1% as the U.S. reporting season drew to a close. At a sector level energy companies led the way, climbing 3.2% despite suffering the worst decline in earnings of any sector over the third quarter, falling 23% year over year. As a cyclical business it is not unusual for the past results and current attractiveness of energy stocks to appear mismatched, and this again is true as energy remains a sector that Morningstar analysts believe is a little undervalued.
Banks Get an Uplift
In contrast, financials saw the highest earnings growth at a sector level and this strength is expected to continue next quarter due to the weakness of the comparator period in 2023. The banks that comprise most of this sector are also expected to benefit from the policies of the new administration. However, Morningstar banking analyst Maoyuan Chen believes that these tailwinds are already reflected in the prices. Although banks appear a little overvalued at an industry level, due to the dominance of dominance of JPMorgan Chase & Co JPM which accounts for 34% of the Morningstar US Banks index, we continue to see value in smaller banks. This reflects the growing need to be selective when investing as prices rise. You can read Maoyuan’s latest piece here.
Dollar Strength
Stocks outside the US lagged. This is due in part to the rise in the US dollar index which rose 0.8% over the week reaching its highest point since November 2022.The Morningstar Developed Markets ex-US index and the Morningstar Emerging Markets index were both almost flat in US dollar terms, rising 0.3% and 0.2% respectively. The strength of the dollar provides a challenge for investors seeking diversification as it acts as a drag on returns and concentrates more of the future value of overseas investing in currency movements. As currencies can depart from their fair value for a long period of time, it is important not to be too reliant on their reversion to fair value but instead seek overseas assets that are attractive in local currency as well as US dollar terms. This is the topic of the first article in our 2025 Outlook which we have just published. You can download the outlook here.
Inflation Back on the Agenda
With fewer companies reporting and the impact of the election fading into the distance, the focus of market commentators this week is likely to return to inflation with the announcement of the latest Personal Consumer Expenditure (PCE) data on Wednesday. Core PCE over the last 12 months is expected to be 2.8%, rising from 2.7% last month. If the actual result is higher, we can expect a further erosion of confidence in a likelihood of a rate cut when the Federal Reserve Open Market Committee next meets in December and consequently some volatility in asset prices. You can review the economic events for the coming week on this calendar.
Highlights of this Week’s Market and Investing EventsTuesday, Nov. 26: Minutes from the November Federal Open Market Committee Meeting, November Consumer Confidence Survey, October New Home Sales, earnings from Macy’s MWednesday, Nov. 27: October Personal Income and Outlays report, October Durable OrdersThursday, Nov. 28: Markets closed in observance of ThanksgivingFriday, Nov. 29: November Chicago PMI, Markets closed at 1:00 p.m. EST in observance of ThanksgivingFor the Trading Week Ended Nov. 22The Morningstar US Market Index rose 2.07%.The best-performing sectors were consumer defensive, up 3.14%, and energy, up 3.12%.The worst-performing sector was communication services, up 1.46%.Yields on 10-year US Treasury notes fell to 4.41% from 4.43%.West Texas Intermediate crude prices rose 5.81% to $71.24 per barrel.Stock Highlights for the WeekOf the 881 US-listed companies covered by Morningstar, 702, or 80%, were up, three were unchanged, and 176, or 20%, were down.Which Stocks Are Up?
Snowflake SNOW, Williams-Sonoma WSM, Amer Sports AS, Elastic ESTC, and EVgo EVGO were the top performers among US-listed stocks covered by Morningstar analysts.
Source: Morningstar. Data as of Nov. 22, 2024. Which Stocks Are Down?
Evotec EVO, Target TGT, GDS Holdings GDS, PDD Holdings PDD, and Iqiyi IQ performed worst among US-listed stocks covered by Morningstar analysts.
Source: Morningstar. Data as of Nov. 22, 2024.